Finding Funding

Go Develop’s Jason Tebb explains why joint venture funding could be the future of development financing.

There is currently real momentum within the UK housebuilding industry, following significant governmental drives on planning, Help to Buy and wider policy changes after so many years of words and no action.

Known for its traditionalism, the industry is waking up to many opportunities and witnessing a need for a wholesale mindset change, as skill shortages and traditional working practices challenge the most efficient and punish the inefficient. As the sector evolves, a case of ‘adapt or be adapted’ will occur.

In round numbers, two thirds of housebuilding is now undertaken by a handful of FTSE250 companies, leaving a third that is picked up by the many SME housebuilders; a decade ago these numbers were reversed. This means that it’s never been more vital for change to be embraced by PLCs and non-PLCs alike.

The reinvented UK housebuilding industry is leaving behind many aspects that have slowed it down over past decades and opting for AI, 3D construction and new materials and methods that will deliver higher volumes, shorter construction timelines, uniformity of product and quality.

Such changes will help to offset the shortages of skilled and unskilled labour and the potential for building material inflation. All of these enhancements should also be supported by the release of more public land for housing development as well as further encouragement from government initiatives.

Help to Buy has been truly innovative for housebuilders, helping to drive supply and profits. It’s a win-win for the industry, the public and the consumer. It wins votes for politicians and more, but it’s not without its critics, and sustainability will have a large part to play for the future of the scheme. One thing is for certain, with the Government promise of 300,000 new homes each year, up from 217,000 – more change will be on the way.

So are house builders ready for the revolution?

Frankly no, because the biggest engine that needs to remain on full throttle is the one that finances the industry.

In the last budget, the Government promised £44bn in investment and loans for housebuilding over the next five years. Actually, this equates to just £15bn in new financial commitments: £7bn of direct funding and £8bn of loan guarantees. This will create only around 83,000 new homes over five years – approximately 16,500 new homes a year, and around 130,000 short of 300,000 new homes a year by 2025. Obviously, there’s still going to be a shortfall and a big need for development finance from elsewhere.

Recently, this funding gap has led to the emergence of peer to peer, crowdfunding, ‘crowdhugging’ and other alternative funding. However, there is still a real lack of understanding within these financial service providers as to what housebuilders need, and many have never seen a reces- sion or experienced the depth and breadth of housebuilding difficulty over the past 30 years.

While Brexit woes have started to recede, the slightest geopolitical or macro- economic blip will have many of these funders scurrying for the hills and with the traditional banks already overweight in the sector, this represents the main threat to the housebuilding revolution of supply finally matching demand.

Therefore, choosing a funding partner for the long term has never been more important for a house builder. A funder who understands the need for flexibility and support through thick and thin is fundamentally important.

Joint venture funding is one form of investment that can provide such certainty, ensuring a development project is seen through from its initial plans to completion without the need for a hefty deposit. Offering 100 per cent full funding to cover land, build, stamp duty and project costs, a joint venture enables a house builder to continue developing even if their funds are tied up in other schemes, or their profits already embedded in the project.

Furthermore, a good joint venture funder offers a whole range of other services from expertise in legals, surveying, accounting, sales and marketing, freeing up the house- builder to focus on the actual build. Ultimately, it offers a better return, limiting capital input, de-risking the house builder’s position and giving greater gearing.

In exchange, the joint venture funder will have some parameters for the house- builder but these should be kept simple. A request that planning permission be in place, some developer experience, and a decent margin of 25 per cent on GDV pre-finance are pretty standard.

Only by providing a funding solution that’s nationwide, flexible, with no cash flow strain and built with house builders in mind, can the demands for the reinvented housebuilding industry be met.

House builders must hunt out that 100 per cent full funding, it does exist and will give greater scale, maximum profit and provide much needed funding in a flexible, sustainable way.

The upshot will be higher volumes of housing delivery and a less volatile profile of output. A winning combination that will go hand in hand with innovation that is arriving through both a development and funding revolution.